MACOM(MTSI) - 2021 Q4 - Annual Report

PART I Business MACOM designs and manufactures high-performance analog semiconductors for Telecom, I&D, and Data Center markets, leveraging a hybrid manufacturing model Overview MACOM, with 70+ years of expertise, designs semiconductors for Telecom, I&D, and Data Center markets using a hybrid manufacturing model - MACOM serves over 6,000 customers across Telecom, Industrial & Defense, and Data Center markets[15] - The company utilizes a hybrid manufacturing model, combining internal U.S. facilities with external foundry partners[17][18] - MACOM's U.S. Department of Defense accredited "Trusted Foundry" status is a key differentiator for I&D military applications[17][31] Markets and Products MACOM targets growth in Telecom (5G), I&D (radar, satellite), and Data Center (high-speed interconnects) with a broad product portfolio - Telecom market growth is driven by increased bandwidth demand for cellular infrastructure and fiber optic networks[27] - The I&D market demands high-performance GaAs and GaN semiconductors for military applications like radar and electronic countermeasures[30] - Data Center market growth is fueled by cloud adoption and upgrades to 100G-800G interconnects, supported by MACOM's comprehensive product portfolio[26][34][35] Sales, Marketing, and Customers MACOM employs a global multi-channel sales strategy, with distributors accounting for 35.0% of fiscal 2021 revenue, and one distributor exceeding 10.7% of revenue Sales to Distributors as a Percentage of Revenue | Fiscal Year | Percentage of Revenue | | :--- | :--- | | 2021 | 35.0% | | 2020 | 45.3% | | 2019 | 33.3% | - Richardson RFPD, Inc. accounted for 10.7% of revenue in fiscal 2021, a decrease from prior years[43] - In fiscal 2020, Gateway Tech Company Limited and Pangaea (H.K.) Limited each contributed 11.5% of revenue, but not in other years[43] Competition MACOM competes in the highly competitive semiconductor market based on product performance, breadth, and supply reliability, facing rivals like NXP and Analog Devices - Key competitive factors include engineering talent, product performance, price, breadth of offerings, and supply reliability[45][53] - Major competitors in Telecom and Data Center markets include NXP, Marvell, Maxlinear, Broadcom, and Semtech[47] - Key competitors in the Industrial & Defense market are Analog Devices, Wolfspeed, Microchip, Qorvo, and Skyworks[47] Human Capital As of October 1, 2021, MACOM employed 1,100 individuals globally, with 71% in North America, and a 9% voluntary attrition rate in fiscal 2021 - As of October 1, 2021, MACOM had approximately 1,100 employees, with 380 in R&D, and 71% located in North America[64] - The workforce is approximately 70% male and 30% female, with females holding 10% of senior management and 15% of engineering roles[65] - The voluntary employee attrition rate was approximately 9% during fiscal year 2021[67] History and Recent Developments MACOM, incorporated in 2009, has a 70-year operational history, marked by strategic acquisitions and a 2019 restructuring plan completed in fiscal 2020 - In January 2017, MACOM acquired Applied Micro Circuits Corporation to expand into enterprise and Cloud Data Center applications[76] - A significant restructuring plan initiated in fiscal 2019, involving ~250 employee reductions and facility exits, was completed in fiscal 2020[79] Risk Factors MACOM faces significant risks including new product development, supply chain vulnerabilities, industry cyclicality, operational challenges, international trade policies, and financial volatility Risks Relating to General Business Conditions General business risks include new product dependency, supply chain interruptions, demand forecasting challenges, customer concentration, industry cyclicality, and potential product defects - Revenue growth relies heavily on the timely development of new products to counteract price erosion[86] - The company relies on limited sources for components creates vulnerability to supply interruptions, delays, or cost increases, worsened by COVID-19[88] - Sales to the top 10 customers represented 48.9% of fiscal 2021 revenue, highlighting customer concentration risk[98] Risks Relating to International Operations International operations, accounting for 54.2% of fiscal 2021 revenue, expose MACOM to currency, trade, and geopolitical risks, particularly in China and Asia Pacific - International sales constituted 54.2% of fiscal 2021 revenue, with a significant portion from China and Asia Pacific[114] - U.S.-China trade policies and China's domestic semiconductor initiatives pose risks, including customer restrictions like the BIS Entity List[114] Risks Relating to Production Operations Production risks include manufacturing yield losses from complex processes, higher costs and adoption challenges for compound semiconductors, and regulatory compliance for U.S. government contracts - Complex manufacturing processes risk significant yield loss or production halts from minor deviations, impacting gross margin[119][120] - Compound semiconductor materials (GaAs, InP, GaN) are more difficult and expensive to manufacture than silicon, potentially limiting adoption[121] Risks Relating to Government Regulations Government regulations, including trade policies, export controls, tax laws, environmental compliance, and data privacy, pose significant operational and financial risks - Products are subject to U.S. Export Administration Regulations (EAR) and International Traffic in Arms Regulations (ITAR), with non-compliance risking substantial fines[133] - As of October 1, 2021, the company held $855.8 million in federal NOL carryforwards, but their realization is uncertain due to a full valuation allowance[136][409] - Compliance with complex supply chain regulations, including "conflict minerals" rules, may increase costs and reputational risk[141] Properties MACOM's main operations are in a leased 281,700 sq ft facility in Lowell, MA, with other key R&D, sales, and manufacturing sites globally Major Leased Facilities | Site | Major Activity | Square Footage | Lease Expiration | | :--- | :--- | :--- | :--- | | Lowell, MA | Admin, R&D, Production, Sales, Test | 281,700 | October 2038 | | Santa Clara, CA | R&D, Sales | 46,270 | October 2024 | | Newport Beach, CA | R&D, Sales | 57,412 | December 2029 | | Ann Arbor, MI | Production, R&D, Test | 50,335 | May 2026 | | Nashua, NH | R&D, Test, Production | 33,750 | December 2024 | | Cork, Ireland | Admin, R&D, Sales | 21,422 | August 2026 | Legal Proceedings As of the filing date, MACOM was not involved in any pending legal proceedings expected to have a material adverse effect on its business or financials - The company reported no pending legal proceedings with a material adverse effect as of the filing date[169] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities MACOM's common stock (MTSI) trades on Nasdaq, with 75 stockholders of record as of November 11, 2021, and limited share repurchases for tax obligations - The company's common stock, MTSI, is traded on the Nasdaq Global Select Market[172] - In fiscal 2021 Q4, 534 shares were repurchased via "withhold to cover" for employee tax obligations, not a public buyback[177] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2021 saw revenue grow 14.5% to $606.9 million, gross margin improve to 56.3%, and a net income of $38.0 million, a significant turnaround from the prior year's loss Results of Operations Fiscal 2021 revenue increased 14.5% to $606.9 million, driven by 44.1% I&D growth, leading to a 56.3% gross margin and $38.0 million net income Fiscal Year 2021 vs. 2020 Financial Highlights (in thousands) | Metric | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $606,920 | $530,037 | 14.5% | | Gross Profit | $341,855 | $270,166 | 26.5% | | Gross Margin | 56.3% | 51.0% | +530 bps | | Income from Operations | $81,002 | $3,388 | 2291.1% | | Net Income (Loss) | $37,973 | $(46,078) | N/A | Revenue by Market (FY 2021 vs. FY 2020, in thousands) | Market | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Telecom | $188,391 | $209,477 | (10.1)% | | Industrial & Defense | $280,221 | $194,506 | 44.1% | | Data Center | $138,308 | $126,054 | 9.8% | - The gross margin increase in FY2021 resulted from higher sales, favorable revenue mix, production efficiencies, and reduced depreciation and amortization[207] Liquidity and Capital Resources As of October 1, 2021, MACOM held $156.5 million in cash and $188.4 million in short-term investments, with $148.4 million in operating cash flow for fiscal 2021 Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $148,412 | $171,397 | | Net cash used in investing activities | $(2,583) | $(107,195) | | Net cash used in financing activities | $(119,095) | $(10,716) | - In fiscal 2021, MACOM issued $450.0 million in 2026 Convertible Notes and used proceeds to prepay $543.6 million in Term Loans[235][369] - As of October 1, 2021, the company reported $156.5 million in cash and $188.4 million in short-term investments[237] Quantitative and Qualitative Disclosures About Market Risk MACOM faces interest rate risk on $120.8 million in variable debt, with limited foreign currency risk due to USD-denominated international sales - Interest rate risk on $120.8 million variable rate debt means a 1% rate change impacts annual interest expense by ~$1.2 million[245] - Foreign currency risk is limited as most international customer agreements are denominated in U.S. dollars[246] Financial Statements and Supplementary Data This section presents MACOM's audited consolidated financial statements for fiscal 2021, with an unqualified opinion from Deloitte & Touche LLP on financials and internal controls Key Balance Sheet Data (as of Oct 1, 2021 vs Oct 2, 2020, in thousands) | Account | Oct 1, 2021 | Oct 2, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $156,537 | $129,441 | | Total Current Assets | $521,536 | $481,519 | | Total Assets | $1,134,145 | $1,146,428 | | Long-term debt, less current portion | $492,097 | $652,172 | | Total Liabilities | $662,409 | $846,282 | | Total Stockholders' Equity | $471,736 | $300,146 | Key Income Statement Data (FY 2021 vs FY 2020, in thousands) | Account | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Revenue | $606,920 | $530,037 | | Gross Profit | $341,855 | $270,166 | | Income from Operations | $81,002 | $3,388 | | Net Income (Loss) | $37,973 | $(46,078) | | Diluted EPS | $0.54 | $(0.69) | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of October 1, 2021, confirmed by Deloitte & Touche LLP's unqualified opinion - Management concluded that disclosure controls and procedures were effective as of October 1, 2021[429] - Internal control over financial reporting was deemed effective by management under COSO 2013 and confirmed by Deloitte & Touche LLP[432][433][437] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2022 Annual Meeting proxy statement - Detailed information for this item is incorporated by reference from the forthcoming 2022 Annual Meeting proxy statement[447] Executive Compensation Executive compensation details are incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting of Stockholders - Detailed information for this item is incorporated by reference from the forthcoming 2022 Annual Meeting proxy statement[449] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2022 proxy statement, with 7,448,729 securities available for future issuance under equity plans Equity Compensation Plan Information (as of Oct 1, 2021) | Plan Category | Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity Compensation Plans Approved by Security Holders | 205,000 | $14.29 | 7,448,729 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 Annual Meeting proxy statement - Detailed information for this item is incorporated by reference from the forthcoming 2022 Annual Meeting proxy statement[453] Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting - Detailed information for this item is incorporated by reference from the forthcoming 2022 Annual Meeting proxy statement[454] PART IV Exhibits, Financial Statement Schedules This section lists financial statements from Item 8 and all exhibits filed or incorporated by reference into the Form 10-K, including governance documents and material contracts - This section provides a list of all financial statements and exhibits filed with the annual report, including material contracts and certifications[456][457]